MENU

Sobey’s Pays a Steep Price to Win Safeway

Today’s big news in the Canadian market is that Empire Co.’s (TSX:EMP.A) wholly owned subsidiary Sobey’s is acquiring Safeway’s (NYSE:SWY) western Canadian assets.  The price, $5.8 billion.

Empire shares are higher by close to 11% based on this announcement, and Safeway’s are up 8.5% (which is in fact down considerably from where they opened) as the company plans to pay down debt and increase its stock buyback with the proceeds.

The Safeway assets will give Sobey’s a western presence that it did not previously have.  The 213 grocery stores that are part of the deal will bring Sobey’s national network to 1,538 locations.  Sobey’s all of a sudden becomes not just the dominant grocer from Quebec east, but also Manitoba west.

The $6.7 billion in sales that Safeway’s western stores did in the 52-week period prior to March 23 will bring Sobey’s total revenues to about $24 billion.  This is second only to Loblaw (TSX:L) and its $30+ billion in annual sales.  These two entities stand head and shoulders above the next largest chain.  Metro (TSX:MRU) had revenues over the past 12 months of just over $12 billion.

Pretty penny

At $5.8 billion, this growth did not come cheaply for Sobey’s/Empire.  And not just in terms of the absolute cash being shelled out.  The table below provides an indication of what the price/sales multiples were in Canada’s grocery space as of last night’s close.  Sobey’s clearly paid a multiple far and above where the rest of the group currently trades for these assets.  No wonder Safeway feels so good about the deal!

Company Name

Price/Sales

Safeway western assets

0.86

Metro

0.53

Loblaw

0.41

Empire

0.26

Safeway

0.13

Source:  Capital IQ

Even if we take out the $1 billion or so that Sobey’s expects to raise by selling/leasing back the associated Safeway real-estate, the multiple still stands at 0.72.

The Foolish Bottom Line

When you pay up like this for a deal, it had better turn out the way you expect.  Sobey’s expects $200 million of annual synergies to eventually be realized through this deal.  These will come through changing Safeway’s distribution and info tech systems, as well as reducing buying, admin, and marketing costs.  Just ask Loblaw how easy it is to implement a distribution/info tech makeover.  Hint:  it’s not.  The takedown of these Safeway assets has been rumoured for some time, it was just a matter of who they would be sold to.  Clearly, Sobey’s made an offer that its peers weren’t willing to make.

Like dividends?  Then you need to click here to download our special FREE report “13 High-Yielding Stocks You Can Buy Today”.  You’ll be rolling in dividend cheques before you know it!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own any of the companies mentioned in this report.  The Motley Fool has no position in any stocks mentioned at this time

Just Released!

Motley Fool CEO Tom Gardner Goes Live and Tells Hong Kong Investors To Buy This Canadian Darling Tech Stock…

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.